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Companies in the Crosshairs

December 1, 2016

Wells Fargo

            The biggest corporate governance story of the autumn in the United States was the massive corruption and fraud at one of the world’s biggest banks, Wells Fargo.  The company entered into a $185 million settlement with the Consumer Financial Protection Bureau, a federal agency created by the post-financial meltdown Dodd-Frank legislation.1 As is typical in these cases, no admission of guilt was required.  Indeed, CEO John Stumpf at first tried to blame inept or dishonest workers, rather than accepting any responsibility.2

            The fraud stemmed from the intense pressure put on lower level employees to “cross-sell” customers by persuading them to open new accounts and obtain new credit cards.  The company’s “Gr-eight” initiative set a goal of at least eight separate accounts for each customer.  Employees risked losing their jobs if they did not cross-sell and received bonuses when they did. Stumpf bragged in investor calls about the success of this program.

            Under extreme pressure to perform, employees opened up millions of fraudulent accounts in the names of bank customers without their knowledge or permission.  Over 5,000 employees have been fired for participating in this widespread fraud, but Carrie Tolstedt, who was in charge of the division, was permitted to retire rather than be fired for cause. She was paid over $100 million.3

            At a Senate hearing, Massachusetts Senator Elizabeth Warren called the bank’s activities a “scam” and told Stumpf, “You should resign. You should give back the money you took . . . and you should be criminally investigated.”

            The company has now announced that it will use clawbacks to force Stumpf and Tolstedt to return some of their compensation.4 On October 26, 2016, a letter written by 15 Democratic senators was sent to six federal regulators urging them to sharpen their Notice of Proposed Rulemaking and make it mandatory for company executives to return all compensation acquired through misconduct.5 The letter also proposed implementing a longer period of time before executives could receive full bonus pay and a seven-year period in which the money can be clawed back if fraudulent activity is uncovered. The senators stated that the Wells Fargo board only called for clawbacks after facing “intense negative publicity” and believed that it was just another example of a major bank failing to hold its executives liable for their actions.

            Wells Fargo employees are now asserting that they were fired for trying to alert the company to the fraud. Civil suits have been filed, and more are undoubtedly in the works.

The California state treasurer has cut off relations with Wells Fargo:6

              Citing Wells Fargo’s “venal abuse of its customers,” the California treasurer took the unusual step on [September 28, 2016] of suspending many of its ties with the San Francisco bank as it continues to reel from the scandal over the creation of as many as two million unauthorized bank and credit card accounts.

              The state treasurer, John Chiang, said he was suspending Wells Fargo’s “most highly profitable business relationships” with the state for at least a year, including the lucrative business of underwriting certain California municipal bonds.

              On [September 27, 2016] alone, he said, he had pulled Wells Fargo off two large municipal bond deals.

              “How can I continue to entrust the public’s money to an organization which has shown such little regard for the legions of Californians who placed their financial well-being in its care?” Mr. Chiang wrote in a letter on Wednesday to the bank’s chairman and chief executive, John G. Stumpf, and the bank’s board members.

Mylan

            There have been a lot of headlines about Mylan’s shocking 400% price increase for the vital EpiPen, which is essential for people with life threatening allergies. With the increase, EpiPens now amount to as much as 40% of the company’s revenues.

            It’s also a study in U.S. tax policy dysfunction and an example of the global “race to the bottom.”  Mylan is a corporate tax dodger, taking advantage of “inversion” so that it is a corporate “citizen” of The Netherlands, though its board is in the United Kingdom and its operations are in the United States.  In addition to escaping taxes, this means it also reduces its accountability through the U.S. corporate governance system. And there is a Citizens United element as well: CNBC reported that Mylan has been “actively lobbying” ($875,000 so far this year, $1.55 million last year) in favor of a bill in the Senate that would mandate that all airlines, domestic and foreign, carry at least two packs of epinephrine auto-injectors. 

Hain Celestial Peer Group Manipulation Should Have Been an Indication of Other Problems

            Gretchen Morgenson wrote in The New York Times7 that Hain Celestial 

came crashing to earth when it disclosed an accounting problem, delayed its full-year financial report and said it probably wouldn’t meet its earnings guidance for 2016.

              Investors have dumped shares in the company, based in Long Island, wiping out $1.5 billion in market capitalization.

* * *

              According to corporate governance experts, clues to oversight problems at Hain have been evident for a while in its excessive executive pay practices and disdain for shareholders’ anger about them.

            Warning signs include a CEO who is also President and Chairman of the Board and who does not hold a significant amount of stock for a founder, less than two percent, and receives much higher pay than the typical founder, who is commonly compensated predominantly through appreciating stock prices.  Shareholders have communicated their objections to the pay and the skewed peer group with increased (non-binding) “no” votes on the compensation.

1    http://www.nytimes.com/2016/09/09/business/dealbook/wells-fargo-fined-for-years-of-harm-to-customers.html
2    http://www.bizjournals.com/sanfrancisco/news/2016/09/14/wells-fargo-ceo-blames-rogue-employees-scandal-wfc.html
3    http://fortune.com/2016/09/12/wells-fargo-cfpb-carrie-tolstedt/
4    http://www.wsj.com/articles/wells-fargo-board-actively-considering-executive-clawbacks-1474985652
5    https://assets.documentcloud.org/documents/3182081/Incentive-Based-Pay-Letter-Wells-Fargo-Sec-956.pdf
6    http://www.nytimes.com/2016/09/29/business/dealbook/california-wells-fargo-john-stumpf.html?_r=0
  http://www.nytimes.com/2016/08/21/business/bloated-pay-came-before-hain-celestials-error.html?_r=0

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